Research Lounge: Konrad Gudjonsson, “Fisheries economics: How Iceland made professional fisheries profitable”

About the Speaker: Konrad earned his B.Sc. in Economics at the University of Iceland before going to Warwick. Coming from a tiny fishing village in a rural part of Iceland, he has learned to understand the industry and how efficient it can be if the right framework is provided. He wrote his undergraduate dissertation on profitability in mackerel fisheries in Iceland and concluded that there was a great capacity for higher profits without increasing the catch.

Why are commercial fisheries so special?
The short answer is simply: The tragedy of the commons. Free and wild fish in the seas are per se not owned by anyone, which gives fishermen incentives to overfish and not consider the effect of their own actions on other fishermen and the fishstocks. This very often leads to unsustainable fisheries, higher costs per unit of catch and low, or even zero, profits in the industry.

Commercial Fisheries around the world.
Around the world, fisheries are generally unsustainable, with small stocks and small profits. Furthermore, fisheries get large subsidies, which are estimated to account for 30-35% of revenues (Milazzo, M. 1998. Subsidies in World Fisheries: A Reexamination). The economic loss has then been estimated by the World Bank to be around $50 billion, which is equivalent to the GDP of Cameroon or Uruguay.

How Iceland solved the problem:
Gradually, from 1970′s until the 1990′s, Iceland implemented what is called “Individually Transferable Quotas” (ITQ). In its simplest version the system works like this: The Fisheries Institute decides each year how much fish can be caught, “Total Allowable Catch” (TAC), based on stock size and looking at maximizing the size of fish stocks in the long run. Then each vessel, or company, is given a fixed percentage (quota) in the TAC which they can fish during that year. These quotas, if they are permanent property, can then be traded between companies.

Why can ITQs work in theory?
First, if the quotas can be traded, those who have the best technology or knowledge are likely to buy quotas from those who are less profitable. Second, ITQs eliminate the competition to catch the fish and give fishermen better incentives to protect their resource, especially if the quotas are permanent property. That essentially eliminates the “Tragedy of the Commons” problem. Finally, the fishermen have incentives to make better long-term investments and invest in R&D.

How has this worked out for Iceland?
– Profits have increased dramatically with net income increasing by 170% in real terms, while catch has decreased slightly.
– Productivity in fisheries has increased more than in other industries and capital utilization has improved with smaller and more efficient fleet.
– Positive impact on the environment with less oil being used for unit of catch and less chance of overfishing.
– The incentives to look at the long-run have increased the prices and brought Iceland to the “best markets” with vertical integration, long-term supply contracts and marketing.
– Has provided a platform for Icelandic companies that service the fishing industry, such as Marel hf.

Challenges ahead:
Although Iceland has overall done well in managing its fisheries in the past two decades, there is still a lot of work to be done. For instance, there are still disputes ongoing over the initial allocation, and the Fisheries laws don’t state clearly how permanent the quotas are.

As mentioned before, the total catch has not increased, which is a bit disappointing but could be caused by other factors. Also, with quotas moving away from some towns and villages has caused negative socio-economic effects. That, along with unhappiness over how few people have earned most of the profits from the industry, has caused the fisheries management to be in center of the debate for some years now.

However, the EU, with its seriously flawed and heavily subsidized fisheries, and other countries should seriously consider ITQs. They could without a doubt both learn from the mistakes Iceland has made, and more importantly, how well Iceland has done relatively to most other countries in managing its fisheries.